TaxTMI 
TaxTMI 
2012 (7) TMI 401
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....ich were claimed as exempt under Section 10(34) of the Act. As per the assessee, it had not incurred any expenditure for earning such income. However, Assessing Officer was of the opinion that assessee would have incurred routine expenditure for maintaining establishment and administrative set up as also some managerial remunerations, in relation to exempt income. Assessing Officer also noted that assessee had incurred interest expenditure of Rs. 11,56,39,871/- and Rs. 16,42,39,101/- for the respective previous years. Though the assessee had denied any borrowed capital being utilized for the investment made, resulting in dividend income, Assessing Officer did not accept this plea. For both the years, he applied Rule 8D of Income-tax Rules, 1962 and made disallowance to the tune of Rs. 4,29,50,325/- and Rs. 6,46,48,754/- respectively. 5. In its appeals before CIT (Appeals), argument of the assessee was that no borrowed capital was utilized for making the investment and the dividend income received was directly remitted to the bank account. As per the assessee, there was no expenditure which had nexus with the utilization of funds invested for earning tax-free income. CIT (Appeals),....
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.... of the Act. Hon'ble Bombay High Court in the case of Godrej and Boyce Mfg. Co. Ltd. v. Dy. CIT (328 ITR 81), has clearly held that Rule 8D applied only prospectively with effect from assessment year 2008-09. Therefore, Rule 8D was not applicable for the impugned assessment years. Nevertheless, their Lordship in that decision also held that though the said rule was not applicable for the earlier years, Assessing Officer was duty bound to compute the disallowance by applying reasonable method having regard to the facts and circumstances of the case. Since the disallowances were made applying a rule which was not applicable for the impugned assessment years, we are of the opinion that the matter requires a re-visit by the Assessing Officer. We, therefore, set aside the orders of authorities below on this issue and remit the matter back to the file of the A.O. for consideration afresh in accordance with law. 9. Thus, Ground No. 2 of the Revenue for assessment year 2006-07, Ground No. 3 of the Revenue for assessment year 2007-08 as well as the sole ground raised by the assessee in their cross appeals are allowed for statistical purposes. 10. This leaves us with the only other ground ....
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....e expression used in Article 13(4) of DTAA was "may be taxed" and therefore, according to the A.O., both the countries had the right to tax such income. Hence, according to him, Income Exclusion Method would not be applied for mitigating the double taxation effect. Only the other method namely, Tax Credit Method could be applied. According to him, Article 24 of DTAA specified only Tax Credit Method and under the Tax Credit Method, the tax credit had to be given to the assessee, for the tax paid in Sri Lanka on such capital gains. Since no tax was paid, there was no scope for any tax credits. In other words, according to A.O., the profit arising out of capital gains arising on sale of shares was to be taxed in India in full. As for the reliance placed by the assessee on the decision of Hon'ble Apex Court in the case of Azadi Bachao Andolan (supra), view of the A.O. was that treaty provisions did override the provisions of the Act. However, when the words used in the treaty where such that 'Income Exclusion Method' could not be used, then it was well within his power to tax such income in India after giving due credit for the tax paid in the country where the capital gains arose. For....
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....establishment in Sri Lanka. The Sri Lankan company also did not have any permanent establishment in India. Insofar as reliance on Article 24 of the DTAA was concerned, argument of the assessee was that the Tax Credit Method for elimination of double taxation could be used only where both the countries had a right to tax the income. The terms "may be taxed" did not mean that the income was taxable in both the countries. Ld. CIT (Appeals) was appreciative of the these contentions of the assessee. According to him, the share transaction levy on shares transacted through the Colombo Stock Exchange in Sri Lanka, was akin to security transaction tax in India. According to him, Section 10(38) of the Act gave exemption for the gains arising out of transfer of shares on which security transaction tax was levied. Similarly, in Sri Lanka on transaction of shares, where share transaction levy was charged, the surplus arising out of such transaction was exempt under Inland Revenue Act of that country. According to him, the interpretation given by the Assessing Officer to Article 13(4) of DTAA was not in consonance with the language and spirit of the Treaty. Ld. CIT (Appeals) was of the opinion ....
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..... The relief that could be granted to the assessee was based on the method of elimination by giving tax credit relief. According to learned D.R., the A.O. had applied Article 24 of DTAA, finding that 'NIL' tax was charged on the capital gains in Sri Lanka and therefore, no tax credit was available to the assessee in India. According to him, capital gains in the case of a resident in India on account of transaction arising outside India, had to be considered as a part of its income based on Section 5 of the Act. Relying on the decision of co-ordinate Bench of this Tribunal in the case of Data Software Research Co. Ltd. (supra), learned D.R. submitted that even though it related to Indo-US Double Taxation Avoidance Agreement, profits of an assessee who was a resident in India, was held to include profits acquired in its US Branch also. As per the learned D.R., this Tribunal had clearly considered the two methods for elimination of double taxation, namely, exemption method and tax credit method and, thereafter, came to a conclusion that the said double taxation treaty did not anywhere prescribed that the profits arising in USA for a resident would be exempt from taxation in India. The....
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....axing enactment of Sri Lanka, there was no question of any credit being given, but on the other hand, the whole of the income had to be excluded while computing the total income of the resident-assessee in India. Specific attention was invited to Article 7 of DTAA with Sri Lanka, by virtue of which business profits could be taxed in the contracting State only to the extent it was attributable to the permanent establishment or sales through such permanent establishment or other business activities carried on similar nature. According to him, Article 7 gave rise to a situation where the income could be taxed in both contracting States. Article 24 which provided for tax credit for taxes paid in one contracting country, would be applicable in such a situation. On the other hand, according to him, Article 13 clearly established that capital gains arising on sale of shares was to be taxed in the contracting State in which such stock or share were issued. Coming to the aspect of Notification No. 90 of 2008 (supra) relied on by the learned D.R., it was submitted that the said Notification was with reference to Section 90A of the Act. As per the learned A.R., the said Notification was, undi....
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....er Contracting State, including such gains from the alienation of such a permanent establishment (alone or with the whole enterprise), may be taxed in that other State. 3. Gains from the alienation of ships or aircraft operated in international traffic or movable property pertaining to the operation of such ships or aircraft shall be taxable only in the Contracting State in which the place of effective management of the enterprise is situated. 4. Gains from the alienation of stocks and shares of a company may be taxed in the Contracting State in which they have been issued. 5. Gains from the alienation of any property other than that referred to in paragraphs 1 to 4 of this Article, shall be taxable only in the Contracting State of which the alienator is a resident. 6. The term "alienation" means the sale, exchange, transfer, or relinquishment of the property or the extinguishment of any rights therein or the compulsory acquisition thereof under any law in force in the respective Contracting State." Case of the assessee falls under clause 4. It says that gains from alienation of shares "may be taxed" in the State of issue. Ar....
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.... is divided in three categories. The first category includes art. 7 (business profits without PE in the other State), art. 8 (air transport), art. 9 (shipping), art. 14 (capital gains on alienation of ships or aircrafts operated in international traffic), art. 15 (Professional services), art. 19 (pensions) which provide that income shall be taxed only in the State of residence. The second category includes art. 6 (income from immovable property), art. 7 (business profits where PE is established in other Contracting State), art. 15 (income from professional services under certain circumstances), art. 16 (income from dependent personal services where employment is exercised in other Contracting State), art. 17 (director's fees), art. 18 (income of artists and athletes), art. 20 (Government service) which provide that such income may be taxed in the other Contracting State, i.e. State of income source. The third category includes art. 11 (dividends), art. 12 (interest), art. 13 (royalty and fee for technical services), art. 14 (capital gains on other properties) and art. 22 (other income) which provide that such income may be taxed in both the Contracting States. For example, para 1 o....
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.... for avoiding double taxation. Assessing Officer himself had admitted that only two methods were available for elimination of double taxation - (i) Income Exclusion Method, and (ii) Tax Credit Method. According to him, there is nothing whatever in the treaty for applying an Income Exclusion Method, since Article 24 thereof dealt with only Tax Credit Method. In our opinion, this view of the Assessing Officer was incorrect. It is for the reason that such exclusion is built-in to the words "may be taxed" appearing in Article 13(4) of the DTAA. When there is total exclusion, it would not be necessary to have a separate article prescribing a method for avoiding double taxation. That when there is a beneficial provision available to an assessee under a treaty, it could rely on such provision is a position of law which stands more or less accepted though various rulings which now have attained finality. 16. Now coming to Notification No. 90 of 2008 (supra) relied on by the learned D.R., the term "may be taxed" of course has been interpreted in such notification. The said Notification is reproduced hereunder:- Notification No. 90 of 2008, dt. 28th August, 2008 28/08/2008 Scope of words....
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....ssociation in India has entered into an agreement with a specified association of any specified territory outside India under sub-section (1) and such agreement has been notified under that sub-section, for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee. (3) Any term used but not defined in this Act or in the agreement referred to in sub-section (1) shall, unless the context otherwise requires, and is not inconsistent with the provisions of this Act or the agreement, have the same meaning as assigned to it in the notification issued by the Central Government in the Official Gazette in this behalf. Explanation 1.-For the removal of doubts, it is hereby declared that the charge of tax in respect of a company incorporated in the specified territory outside India at a rate higher than the rate at which a domestic company is chargeable, shall not be regarded as less favourable charge or levy of tax in respect of such company. Explanation 2.-For the purposes of this section, the expressions- (a)&....